Did you know that 87% of experienced arbitrators report *always* trying to follow applicable law in rendering an award?  That will come as a surprise to many critics who like to complain that arbitrators do not adhere to established law.

The statistic comes from a survey that Prof. Thomas Stipanowich of Pepperdine University School of Law conducted recently.  He obtained responses from 134 highly experienced arbitrators –most of them had arbitrated more than 100 disputes in their career — to a range of questions.  And the results dispel some myths about arbitration.

Here’s another myth-buster: less than 1% of these arbitrators refuse to rule on motions for summary judgment.  Instead, about 70% of these arbitrators say they “readily” rule on dispositive motions.

A less surprising statistic is this one: 91% of responding arbitrators “usually” or “always” work with counsel to limit discovery, and 94% “usually” or “always” encourage the parties to limit the scope of discovery.  Here’s another non-shocker: 75% of these arbitrators generally “receive virtually all non-privileged evidence and discourage traditional objections (hearsay, foundation, etc.).”  Experienced arbitrators are proactive case managers in other ways as well, with the great majority requiring parties to submit a core collection of joint exhibits for the hearing, limiting duplicative testimony, and telling counsel when a point has been understood and “they can move on.”  (That is always an awkward moment.)

So, if there is a lull in conversation this Thanksgiving, you can shake things up by asking: “Did you know that most people choose to serve as arbitrators because they see it as a form of public service and a logical extension of their professional practice?”  I am sure that will receive just as welcome a reception as my recent query at a dinner party: “Tell me, what is your preferred method of judicial selection?”  [My husband won’t let me live that one down.]

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Other interesting arbitration news and notes.

The DC Circuit ruled last week that FOIA does not require the Securities and Exchange Commission to turn over documents it collected while examining FINRA’s arbitration program.  Public Investors Arbitration Bar Assoc. v. SEC, __ F.3d __, 2014 WL 5904725 (D.C. Cir. Nov. 14, 2014).  An organization of lawyers who represent individual investors in FINRA disputes had requested those records.

The NLRB won’t go down without a fight on its controversial D.R. Horton ruling, which held that federal labor laws do not allow employers to force employees to give up class actions in arbitration.  In a late October opinion it wrote “we have carefully considered, and fully addressed, the views of both the Federal appellate courts that have rejected D.R. Horton and the views of our dissenting colleagues.  We have no illusions that our decision today will be the last word on the subject, but we believe that D.R. Horton was correctly decided, and we adhere to it.”

Finally, as of this month, the College of Commercial Arbitrators has its first female President, Deborah Rothman.  Cheers!

A few months ago, the Ninth Circuit found that the arbitration agreement in Barnes & Noble’s website was not enforceable.  This week, the Ninth Circuit found that the arbitration agreement Sirius XM Radio relied upon was not enforceable because the user did not know he had any agreement with Sirius XM, let alone an arbitration agreement.  Knutson v. Sirius XM Radio Inc., __ F.3d__, 2014 WL 5802284 (9th Cir. Nov. 10, 2014).

The plaintiff in this case purchased a Toyota truck.  The truck came with a 90-day trial subscription to Sirius XM satellite radio.  The plaintiff did not have to sign any documents to receive or activate the radio, it was activated just after his purchase.  Over a month later, the plaintiff received a “Welcome Kit” in the mail from Sirius XM.  The kit had a customer agreement with an arbitration provision.  The plaintiff did not pay any attention to the Welcome Kit. The plaintiff also did not ask to end his trial subscription.

Five days after the trial subscription ended, the plaintiff brought a putative class action suit against Sirius XM.  He alleged that Sirius XM made three unauthorized calls to him that violated the Telephone Consumer Protection Act.  Sirius XM quickly moved to compel arbitration, pointing out that not only did the dispute belong in arbitration, but the plaintiff had waived his right to a class action in the arbitration provision.  The district court granted the motion and the Ninth Circuit reversed.

The Ninth Circuit found that Sirius XM and the plaintiff never formed any contract at all.  First, applying California contract law, the court found that at the time of the truck purchase, no reasonable person would understand that he had agreed to arbitrate with Sirius XM.   Indeed, there was no reason to think the plaintiff had entered into a contract with anyone but Toyota.  Second, the court found that the plaintiff’s continued use of the radio service after receiving the Welcome Kit did not operate to form a contract with Sirius XM. (The Welcome Kit stated that if the subscription was not canceled within 3 days of activation, the customer was deemed to have accepted the terms.)  The court concluded the customer was not obligated to review the entire Welcome Kit and act on it because “there was no effective notice that action was required.”

Although the court refused to acknowledge three “shrinkwrap” cases from California district courts were rightly decided, it distinguished them anyway.  (Those cases had all upheld agreements provided to a customer after the initial point of sale.)  It summarized that “[h]ere, by contract, there is no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a  contractual relationship with the satellite radio service provider.”  Because there was no initial transaction between the parties, in other words, the customer had no reason to closely review things in the mail from Sirius.  As a public service, the court even explained how Toyota and Sirius XM could remedy this situation going forward.  (Give notice in Toyota’s purchase agreement or other literature.)

A retailer/service provider should now consider that: a general term of use on its website is not sufficient to bind customers to arbitration; an arbitration agreement provided after the customer agrees to the service may not be sufficient (whether paper or electronic); and any arbitration agreement will not be upheld if the customer did not have reasonable notice of the terms at the time of purchase (see Zakaib and these cases).  This is fair.  If companies are going to be able to reap major litigation benefits by using arbitration agreements (precluding class actions and restricting types of damages, for example), consumers should at least have the option of reviewing those provisions and saying “no thanks.”

The Supreme Court of Hawai’i concluded last week that it is fundamentally unfair to allow one party to an arbitration agreement to unilaterally select the arbitral forum. Nishimura v. Gentry Homes, Ltd., __ P.3d__, 2014 WL 5503393 (Haw. Oct. 31, 2014).  The parties can either jointly agree to a forum, or the court will select it for them.

A putative class of homeowners sued their builder, alleging the homes lacked “adequate high wind protection.” The builder moved to compel arbitration. The arbitration agreement called for binding arbitration of all disputes relating to the design or construction of the home. It also stated the “arbitration shall be conducted by Construction Arbitration Services, Inc., or such other reputable arbitration service that [the warranty service corporation] shall select, at its sole discretion…” Because Construction Arbitration Services, Inc., was no longer administering construction arbitrations, the agreement allowed the builder and its warranty service to unilaterally chose the entity that would administer the arbitration.

The Hawaii high court refused to allow the builder such one-sided power. It adopted the Sixth Circuit’s “fundamental fairness” test to determine “whether an arbitrator-selection provision is enforceable.” Applying that test, the court affirmed the lower court’s finding that the sole discretion in the arbitration agreement is fundamentally unfair. (The court also clarified that a party challenging the arbitration agreement’s arbitrator selection process does not need to wait until the arbitration is over and does not need to prove actual bias.) The court therefore severed the arbitrator-selection sentence from the agreement, and affirmed the lower court’s order requiring the parties to try and agree on an arbitration service or else the court would fill in the gap.

I am not sure why the Sixth Circuit, and then Hawaii, would establish a separate test for invalidating an arbitrator selection provision, instead of just applying a routine unconscionability analysis. Creating a special test for arbitrator selection seems to invite a preemption argument.

Finally, a post script from last week’s post (noting that a wife was not bound to her husband’s arbitration agreement on a golf cart purchase). This week, a case went the other way, finding a wife was bound to her husband’s arbitration agreement. In Everett v. Paul Davis Restoration, Inc., __ F.3d __, 2014 WL 5573300 (7th Cir. Nov. 3, 2014), the court found that the wife had received many direct benefits from the franchise agreement signed only by her husband and therefore was bound by its arbitration agreement. (For example, she was a half owner of the company that ran the franchise and benefitted from “trading upon the name, goodwill, reputation and other direct contractual benefits of the franchise agreement.”) It also did not help that the husband-wife team colluded to avoid the restrictive covenant in the franchise agreement.

In three cases in recent months, courts have found that plaintiffs who did not sign an arbitration agreement (non-signatories) are not obligated to arbitrate.  In all three cases, a key issue was that the plaintiff’s claims in court did not rely on the contract containing the arbitration clause.

In the most interesting and widely applicable case, the Fifth Circuit found that a spouse is not necessarily bound by an arbitration agreement signed by her spouse. Zinante v. Drive Electric, LLC, 2014 WL 4567762 (5th Cir. Sept. 16, 2014). After a defective electric golf cart allegedly caused a fire in Mrs. Zinante’s home, she sued the seller of the cart. The seller moved to compel arbitration, based on a clause in the purchase agreement that only her husband executed. The seller first argued that Mrs. Zinante was equitably estopped from avoiding arbitration. The Fifth Circuit disagreed, because Mrs. Zinante’s claims were not based on the purchase agreement nor “intertwined” with the purchase agreement  (she claimed negligence). The seller also argued that Mrs. Zinante was a third party beneficiary of the purchase agreement. Without even cracking a joke, the court noted there was “no evidence that [husband] intended for his spouse [] to benefit from the purchase of the golf cart.” [Couldn’t there have been a funny footnote about how she didn’t even golf?  Or how the husband kept the cart in the neighbor’s garage so the wife couldn’t use it?] In sum, the court found “the spousal relationship alone does not make Zinante a third party beneficiary to the contract.”

In an another case, Merrill Lynch was accused in court of having helped to “disrupt” a decedent’s estate plan.  Malloy v. Thompson, __S.E.2d___, 2014 WL 4087881 (S.C. Aug. 20, 2014).  It tried to compel arbitration of that claim, based on the arbitration clause in the decedent’s contract.  Although neither the decedent nor his estate were party to the case, Merrill Lynch argued that any duty it had to the plaintiff derived from its client agreement, so the plaintiff was bound by that agreement.  The South Carolina Supreme Court recited five bases for compelling arbitration with non-signatories, and found Merrill Lynch had not proved any of them, largely because the plaintiff’s claim was based on a general tort theory and not on any contractual duties grounded in the client agreement.

Finally, the Third Circuit refused to compel arbitration of an insurance dispute.  Flintkote Co. v. Aviva PLC, __ F.3d__, 2014 WL 5033218 (3d Cir. Oct. 9, 2014).  In Flintkote, a supplier of asbestos-based products moved to compel arbitration of a dispute between it and its insurance company over  the scope of coverage available.  The parties’ agreement, however, explicitly called for resolution through litigation: “nothing contained in…this Agreement…shall required [Aviva] and Flintkote to resolve any disputes that may arise between them…through ADR.”  The insured argued that because the insurer had participated in a mediation of claims and had drafted an arbitration agreement for the insured to sign (that was never executed), the insurer was equitably estopped from refusing to arbitrate.  The court disagreed, finding that the inurer did not clearly and convincingly “embrace” the insured’s agreement with other insurers (that called for arbitration) by mediating or taking other actions.  The court also concluded that the insured did not reasonably rely on the insurer’s offer to arbitrate.

Finally, on a related topic, the Supreme Court of Alabama ruled that if the parties have incorporated the AAA rules, it is clear and unmistakable evidence that the arbitrator should decide whether a non-signatory is obligated to arbitrate.  Anderton v. The Practice-Monroeville, P.C., __ So.3d__, 2014 WL 4798898 (Ala. Sept. 26, 2014).  It relied in part on the Eighth Circuit’s recent decision on that same issue.

What did we learn today?  If you are buying a product that could harm you, make sure only your spouse signs the agreement with the arbitration clause.  Happy Halloween everyone!

Two parties recently convinced federal circuit courts that the language of their arbitration agreements was not sufficient to compel arbitration of their disputes. Both cases turned on how courts “harmonize” language from different parts of an agreement or from multiple agreements.

The decision from the Eighth Circuit was a pretty easy one. The parties’ contract required them to mediate any dispute. Then it said: “if the dispute is not resolved through mediation, the parties may submit the controversy or claim to Arbitration. If the parties agree to arbitration, the following will apply…” The party fighting arbitration (a city in South Dakota) argued the quoted language does not mandate arbitration, it makes arbitration an option for the parties, so the case should remain in court.

The party seeking arbitration emphasized a sentence at the end of the arbitration paragraph saying that the arbitrator’s “decision shall be a condition precedent to any right of legal action.” It argued that the only way to harmonize that language is to conclude that arbitration is required. The court disagreed, finding that a reasonable interpretation is simply that if the parties decided to arbitrate, the arbitration decision is a condition precedent to further legal action. Quam Construction Co., Inc. v. City of Redfield, __ F.3d___, 2014 WL 5334781 (8th Cir. Oct. 21, 2014). Therefore, the Eighth Circuit affirmed the district court’s denial of the motion to compel arbitration.

The Fifth Circuit had a harder case in Sharpe v. AmeriPlan Corp., __ F.3d__, 2014 WL 5293707 (5th Cir. Oct. 16, 2014). In that case, three former sales directors of a company sued for breach of contract after they were terminated. The company moved to compel arbitration and the district court granted the motion.

Their original employment agreements with the company did not call for arbitration, in fact they set the venue for legal proceedings exclusively in Texas courts. The employment agreements also incorporated a “Policies and Procedures Manual.” The employment agreements could only be modified with written consent of all parties, but the Manual could be unilaterally modified by the company. Years later, the company amended its Manual to provide for mandatory arbitration.

The Fifth Circuit reversed the district court, finding that the new arbitration clause was unenforceable. First, the court concluded that the jurisdiction and venue clauses in the original employment agreements survived the amendment to the Manual, because there was no written and signed change to the employment agreements themselves and because the company had affirmatively relied on the venue clause (calling for Texas courts) when it transferred the case from California to Texas. And second, the court found that the old and new provisions “cannot be harmonized” without rendering the original agreement meaningless.

There are drafting lessons from these cases: if you want to have mandatory arbitration of disputes, the contract must consistently say that, and if you want to modify existing agreements to add arbitration, make sure to honor any language in the original agreement about how that agreement can be amended or modified and be clear what clauses are replaced or superceded.

Using a different analysis, but reaching the same result as a recent decision from the Seventh Circuit, the Eleventh Circuit agreed that a defendant could not compel arbitration of consumer claims before the Cheyenne River Sioux Tribal Nation in South Dakota.  Inetianbor v. CashCall, __ F.3d__, 2014 WL 4922225 (11th Cir. Oct. 2, 2014).  The Eleventh Circuit found that arbitral forum was integral to the parties’ agreement, but unavailable, and therefore the dispute could remain in federal court.

The consumer in this case sued the loan servicer in federal court and the servicer moved to compel arbitration.  The loan agreement called for disputes to be “resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules.”  The district court initially compelled arbitration and the consumer twice tried to demand arbitration.  In response, the Tribe explained it did not conduct arbitration.  (In fact, the Tribal Elder that the servicer chose as an arbitrator explained that the “Tribe has nothing to do with any of this business.”)  Based on that evidence, the district court changed course and refused to compel arbitration.

The Eleventh Circuit affirmed.  First, it found that because the agreement had many references to the Tribe (it was referenced in five of nine paragraphs about arbitration), the choice of that arbitral forum was “integral” to the arbitration agreement.  The pervasive references to the Tribe also prevented the court from using the severability clause to “sever” the choice of forum and compel arbitration in some alternative forum.  Second, the court agreed with the district court that the chosen forum was unavailable.  It noted that the Tribe did not authorize arbitration, the chosen arbitrator refused to serve, and the Tribe lacked any consumer dispute resolution rules.

An interesting aspect of this decision is how the analysis differs from the Seventh Circuit’s analysis of the same provision in August.  The Seventh Circuit refused to enforce the arbitration agreement because it found it: 1) illusory; and 2) unconscionable.  It did not analyze whether the forum was integral to the parties’ arbitration agreement.

Another interesting point of comparison is with the decisions that enforce arbitration provisions, even when they call for an arbitral forum that no longer accepts cases (like the National Arbitration Forum), because the forum was not integral to the parties’ arbitration agreement.  A concurrence in Inetianbor distinguished those cases by noting that the NAF was a valid forum, with relevant rules, when the contracts were drafted and simply became unavailable over time.  In contrast, in these payday loan cases it appears the Cheyenne River Sioux Tribal Nation was never prepared to handle consumer arbitration.

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Other ArbitrationNation News

SCOTUS recently decided NOT to review two arbitration cases.  The first was a decision from the West Virginia Supreme Court, finding an arbitration agreement was not properly incorporated into the parties’ contract.  (Here’s the SCOTUSblog case page.)  The second was a decision from the Ninth Circuit about when to find parties have waived their right to arbitrate.  (Here’s the SCOTUSblog case page.)  To my knowledge, there are no juicy arbitration cases coming up on the Supreme Court’s docket. 🙁

The Minnesota Supreme Court today unanimously confirmed an arbitration award of over $600 million in punitive sanctions. Seagate Technology, LLC v. Western Digital Corp., (Minn. Oct. 8, 2014).  Although the appellant argued the arbitrator exceeded his authority by severely sanctioning appellant for fabricating evidence, the court concluded that the parties’ agreement gave the arbitrator power to impose the sanctions. In contrast to the two recent state court decisions vacating arbitration awards, this decision deserves a gold star. (Of course it does. In Minnesota, the women are strong, the men are good looking, and the judges are all above average.)

The parties’ arbitration agreement provided that arbitration would proceed “in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy.” The relevant AAA rules in turn empowered the arbitrator to “grant any remedy or relief that would have been available to the parties had the matter been heard in court.”  The court found that both the language of the agreement and the incorporated rule were broad enough to allow the arbitrator to issue sanctions, even big sanctions, against a party who fabricated evidence.

The court found the sanctions were “injunctions or other relief” within the meaning of the agreement, and a “remedy or relief” contemplated in the AAA rules. The court therefore held the arbitrator did not exceed his power and the award could not be vacated. (The court also disagreed with the opinion below by finding that arbitrators do not automatically have power to sanction parties, it must come from the language of the parties’ agreement or any incorporated arbitral rules.  The court refused to get into the merits of whether punitive sanctions was an appropriate remedy given the specific facts of this case, noting that the parties chose arbitration and with that choice comes “very limited review of the final award.” )

The court also found the arbitrator did not “refuse to hear evidence” within the meaning of the statute allowing vacatur. Because the arbitrator conducted a full evidentiary hearing before issuing his sanctions award, the court construed the appellant’s challenge as centering on how the arbitrator used or weighed evidence, which is not a basis for vacatur.

The most surprising thing about this case is that the parties do not appear to have argued for application of the FAA.  In fact, the court analyzed the case under Minnesota’s Uniform Arbitration Act (which has since been replaced by the Revised Uniform Arbitration Act).  Given that both of these parties engage in interstate commerce every day, never mind the sheer dollars at issue in this dispute, the FAA definitely applies.  Although the award would be confirmed under both state and federal arbitration statutes, I would have loved to see the Minnesota Supreme Court use this case as an opportunity to help educate the Minnesota bar about the broad application of the federal act.

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Other ArbitrationNation News

The University of the District of Columbia Law Review is looking for practitioners to present at its March 2015 conference: “Not All Controversies End in Court: Checking the Balance In Alternative Dispute Resolution.” If you are interested, send an abstract of 200 words or less to lawreview@udc.edu by November 1.

Two good new articles are available from Prof. Thomas Stipanowich, both including empirical data from recent surveys of arbitrators and mediators. The first is “Commercial Arbitration and Settlement: Empirical Insights into the Roles Arbitrators Play,” available at http://ssrn.com/abstract=2461839. The second is “Managing Construction Conflict: Unfinished Revolution, Continuing Evolution” available at http://ssrn.com/abstract=2484598.

 

In an example of “What Not to Vacate,” the South Dakota Supreme Court just vacated an arbitration award because the arbitrator dared to apply a South Dakota statute allowing attorneys’ fees to the claimant. A week earlier, the Ohio Supreme Court also vacated an arbitration award for granting a remedy that the court found exceeded the panel’s contractual power.

In the South Dakota case, the arbitrator awarded the claimant attorneys’ fees and costs under South Dakota’s Uniform Limited Liability Company Act. Black Hills Surgical Physicians, LLC v. Setliff, __ N.W.2d __, 2014 WL 4815715 (S.D. Sept. 24, 2014). The state supreme court vacated those fees and costs, finding they exceeded the arbitrator’s power because the contract stated that the parties “agree . . . that each shall pay their own attorneys’ fees.” Citing mostly to labor law cases from the 1960s-1980s, the court concluded that because the arbitrator based her award on law outside the contract (i.e. the applicable statute), she exceeded her power.

Similarly, the Supreme Court of Ohio vacated a portion of an arbitration award reinstating a high level employee to his previous position because it found the arbitration panel exceeded its power. Cedar Fair, L.P. v. Falfas, __ N.E.3d__, 2014 WL 4649951 (Ohio Sept. 18, 2014). Again citing liberally from decades-old labor law cases, the court found that the contract limited the panel’s authority on remedies by stating the panel had authority “to award any remedy or relief that [a state] or federal court in Ohio could grant.” Because the “general rule” in Ohio is that specific performance is not an available remedy for breach of an employment contract, the court found the arbitrators exceeded their power and vacated the reinstatement award. (Instead, the court awarded the employee his base salary for the remainder of his employment term.)

These cases gave me an idea. Instead of reviewing limited cases on an individual basis, SCOTUS should issue a list of guidelines for state courts deciding arbitration disputes. (Can’t you just see it? MEMO TO: All state courts. RE: Your Opinions Are Screwing Up Our Arbitration Jurisprudence. FROM: SCOTUS.)

For example, the subset of guidelines for state courts considering whether to vacate an award could include these five pearls of wisdom:

  • Consider whether the Federal Arbitration Act applies to the dispute (ask the parties to brief that issue if they did not already).
  • Do not rely on any cases before 2000. The law in this area has been evolving rapidly. [This could have changed the outcome of both Black Hills and Cedar Fair.]
  • Do not use standards or language from labor law cases when considering whether to vacate cases that do not involve a collective bargaining agreement. The standards are different. See Associated Elec. Coop., Inc. v. Int’l Bhd. of Elec. Workers, Local No. 53, __ F.3d __, No. 12-3712, 2014 WL 1910604, at *6 (8th Cir. May 14, 2014). [This also could have changed the outcome of both Black Hills and Cedar Fair.]
  • Consider the impact of the arbitral rules on the dispute (ask the parties to brief that issue if they did not already). For example, if AAA rules are mentioned in the arbitration agreement, the arbitrator has the powers outlined in those rules. [This could have changed the outcome of both Black Hills and Cedar Fair, but the opinion does not show whether any set of rules was incorporated.]
  • Read Sutter. And Hall Street.

Any others I should add to the list??!

By the way, the Supreme Court of Florida deserves a gold star on this topic. In Visiting Nurse Assoc. of Fl. v. Jupiter Medical Ctr., Inc., __ So.3d__, 2014 WL 3360314 (Fl. July 10, 2014), it provides a good example of how to analyze a claim for vacatur. The losing party in arbitration claimed the award “impermissibly construed the parties’ contract in a manner that violated multiple federal laws” and the arbitration panel “exceeded its powers by contravening the express contractual limitations.” The court first conducted a sua sponte analysis to determine that the FAA controlled, then agreed with federal circuits finding the four bases for vacatur in Section 10 are exclusive, so that “illegality of the award” is not recognized. It then applied the analysis in Sutter to conclude that the argument about exceeding power was essentially an argument that the losing party “simply disagrees with the panel’s construction of the contract.”

Two state supreme courts found consumer arbitration agreements unenforceable in the past week: Arkansas and New Jersey. Arkansas grounded its decision on the lack of mutuality in the consumer arbitration agreement (similar to Missouri’s recent ruling). Alltel Corp. v. Rosenow, 2014 WL 4656609 (Ark. Sept. 18, 2014). New Jersey grounded its decision on the arbitration agreement’s failure to clarify that the consumer was giving up its right to a court trial. Atalese v. U.S. Legal Servs. Group, __ A.3d __, 2014 WL 4689318 (N.J. Sept. 23, 2014).

Alltel is a consumer class action alleging that a cell phone provider engaged in a deceptive trade practice when it charged early termination fees. The company moved to limit the class to exclude customers with arbitration provisions, and later to compel arbitration with those customers, and the trial court denied those motions. On appeal, the Supreme Court of Arkansas affirmed the lower court’s finding that the arbitration agreement was unenforceable.

Critically, the Alltel arbitration agreement was preceded by this clause “If we do not enforce any right or remedy available under this Agreement, that failure is not a waiver.” The court construed that clause as “Alltel clearly reserv[ing] to itself the option of pursuing remedies other than arbitration, without the consequence of waiver. Moreover that reservation and protection was limited solely to Alltel and was not extended to the customer.” Therefore, the court found the arbitration agreement was invalid because it lacked mutuality. The court also found that its result was not preempted by the FAA, because Arkansas considers “the doctrine of mutuality” when analyzing all contracts. However, the opinion does not appear to cite any case outside the arbitration context to support that statement. (That’s Problem Number One with this decision, ie. preemption and Concepcion. Problem Number Two is that the court ignores the Prima Paint doctrine by looking outside the arbitration agreement to find the lack of mutuality. )

Atalese is an individual claim by a consumer who contracted with a debt-adjustment company, and then sued for violations of the consumer fraud act, among other claims. The contract stated that “any claim or dispute” related to the agreement “shall be submitted to binding arbitration” and that “any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.” The company moved to compel arbitration. The trial court granted that motion and the intermediate appellate court affirmed.

The New Jersey Supreme Court reversed, largely by characterizing arbitration as a waiver of a citizen’s right under the New Jersey Constitution to a trial by jury and assuming that “an average member of the public may not know…that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Given that framing of the issue, the court found the arbitration clause lacked “clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief,” and therefore was unenforceable. Like the Arkansas court, New Jersey tried to shield itself from Concepcion by positioning its decision as a general application of New Jersey contract law. The opinion has a string cite that continues for half a page, in which all the opinions cited relate to waivers of statutory rights. Notably, though, the court does not address the fact that SCOTUS has not found the Sixth Amendment right to a jury trial an impediment to enforcing arbitration agreements.

What can we say about these two cases and last post’s Missouri case? I can find ways that each of them contravene federal case law, but it is unlikely that SCOTUS will take the time to correct them. However, these cases do point to a real need to clarify the Concepcion decision. If the intent of the Concepcion decision was to tamp down on state courts’ creativity in developing “general state law doctrines” that invalidate arbitration, it is simply not doing its job.

Cue the R.E.M folks, because the Supreme Court of Missouri issued a 4-3 opinion recently that appears to upend many employment arbitration agreements in that state.  Baker v. Bristol Care, Inc., __ S.W.3d__, 2014 WL 4086378 (Mo. Aug. 19, 2014).  However, the situation is not as dire as it may seem.

The high court in Missouri agreed with the lower court that the arbitration agreement in the parties’ employment contract was invalid (and therefore the employer could not compel arbitration of the putative class action claim by plaintiffs seeking unpaid overtime).  In particular, it concluded that “there was no consideration to create a valid arbitration agreement” for two reasons: continued at-will employment was insufficient consideration; and the arbitration agreement was illusory.

In this case, the employee was first asked to sign an arbitration agreement upon receiving a promotion to a managerial position.  But the managerial agreement allowed the employee to be terminated without notice and receive only five days’ compensation.  Based on that, the court characterized the arrangement as at-will employment, and followed earlier Missouri cases finding “continued at-will employment is not valid consideration to support” an arbitration agreement.  That conclusion puts Missouri at odds with many other courts around the country.  However, the court relied on its ability to apply generally applicable Missouri contract law, even in the context of the FAA, and found “an offer of continued at-will employment is not valid consideration [for an arbitration agreement] because the employer makes no legally enforceable promise to do or refrain from doing anything it is not already entitled to do.”

The arbitration agreement also allowed the employer “to amend, modify or revoke this agreement upon thirty (30) days’ prior written notice to the Employee.”  The court concluded that that statement allowed the employer to modify the agreement “unilaterally and retroactively,” making it illusory.  The court hypothesized that the provision allowed the employer, in the course of an arbitration that was not going its way, to provide the employee notice that “effective in 30 days, it no longer would consider itself bound by the results of the arbitration.”  For that reason, the employer’s argument that the arbitration agreement was supported by consideration due to its “mutuality” failed.

For employees, this is another case in the string of cases finding arbitration agreements illusory and therefore unenforceable.  For employers who are worried about arbitration agreements in Missouri, I have an easy solution.  Make sure that if you have a modification clause, it does not apply to existing disputes.  That simple change would have likely make this arbitration agreement enforceable and probably avoided the class action.  (The Missouri Supreme Court made clear that the arbitration agreement was “enforceable if either source of consideration [was] valid,” so true mutuality alone should be sufficient.)

In my view, though, the enforceability of this arbitration agreement should never have been considered by the court.  The parties’ agreement gave the arbitrator “exclusive authority to resolve any disputes relating to applicability or enforceability of this Agreement.”  The Missouri Supreme Court found that clause did not give the arbitrator authority to address the plaintiff’s defenses to arbitration, however, because they were about contract formation, which it distinguished from contract enforceability.  While contracts professors and hornbooks talk about  peppercorns being necessary to form a contract in the first place, in real life consideration is an enforceability issue.  It is not a dispute about whether the parties really signed the contract, or had authority to sign, or whether this document really was incorporated into the parties’ agreement, which are the type of challenge to the entire arbitration agreement that SCOTUS has said do belong in court.  Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444 n.1 (2006).  Instead, it is an argument that the employee’s assent to the contract should be invalidated post-hoc because the contract did not meet state law rules, more akin to unconscionability challenges than true formation challenges.